Wednesday, 31 August 2016

US crude oil fell 1.3 percent as the US dollar rose for the third consecutive day.

“By all appearances, the move down in the market today is driven by a stronger dollar and heightened expectations of a rate hike by the Fed this year,” said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management.

However, some analysts think that the Fed will not hike in September.

Kully Samra, managing director at Charles Schwab, said: “The economy is in a strong place—they’re in a strong place to hike in September—but given the track record we’ve seen, I think it’s unlikely.”

Monday, 29 August 2016

When the next recession hits the US economy, expect more of the same from the Federal Reserve. From Bloomberg:

Faced with disappointing growth after years of ultra-low interest rates, Federal Reserve Chair Janet Yellen and her peers who met this weekend in Jackson Hole, Wyoming, re-affirmed their belief in power of monetary policy to stop economies from slipping into deflation. They were less keen on academic proposals that included the abolition of cash, raising their inflation targets, or keeping permanently large balance sheets.

However, Fed officials did recommend more help from the fiscal side.

During the meeting Yellen and three regional Fed bank presidents -- Robert Kaplan of Dallas, Eric Rosengren of Boston and Loretta Mester of Cleveland -- all urged fiscal policy makers to step up.

The Fed may need that help soon: ZeroHedge reports that JP Morgan sees a 37 percent chance of a recession in the next 12 months.

Markets fell after Federal Reserve Chair Janet Yellen cited “continued solid performance of the labor market” in saying that the “case for an increase in the federal funds rate has strengthened in recent months” in her speech on Friday at a meeting of central bankers and economists in Jackson Hole.

Federal Reserve Vice Chairman Stanley Fischer told CNBC on Friday that the US economy has strengthened and is “reasonably close to what is thought of as full employment”.

He added that Yellen's comments were consistent with the possibility of as many as two rate hikes this year.

A paper published on Monday that Fed Up organiser Jordan Haedtler co-wrote with Dartmouth College economist Andrew Levin and the Economic Policy Institute’s Valerie Wilson recommended that it is “appropriate” for the Fed to consider employment and wages in setting the course of monetary policy “but the transcripts of FOMC meetings provide little evidence that Fed officials have actually done so”.

Senator Richard Shelby made an important observation last week that the Federal Reserve's intervention in the Bear Stearns' wipeout dangerously crossed the line from monetary policy to fiscal policy. I couldn't agree more. The Fed's actions in that case were outside of its mandate precisely because by taking Bear's assets into its own portfolio, the Fed effectively provided public funds to a private corporation without recourse if the collateral goes bad. Only Congress has that power. It was literally an illegal act, but it was also done so quickly that it was presented as an irreversible fait accompli...

“No one wants to be in the market, they don’t trust the market,” said Craig Hodges, chief executive of Dallas-based Hodges Capital Management, adding: “To me, we are in a bull market and no one realizes it.”

Wednesday, 24 August 2016

"If we continue to keep getting strong economic data it will become hard for the Fed to rationalize not hiking rates," said Erik Wytenus, global investment specialist at JP Morgan Private Bank.

Indeed, Savita Subramanian, equity and quantitative strategist at Bank of America, said on Tuesday: “BofAML interest rate forecasts imply a far more aggressive pace of Fed tightening than is currently priced into the market.”

Subramaniam also noted that “U.S. stocks look expensive versus history on most metrics”, and thinks that the market is ripe for a selloff.

Tuesday, 23 August 2016

The S&P 500 fell less than 0.1 percent but the STOXX Europe 600 rose 0.1 percent and the Nikkei 225 rose 0.3 percent.

US crude oil ended a seven-session winning streak to fall 3 percent.

Oil was weighed down by a stronger US dollar after Federal Reserve Vice Chairman Stanley Fischer said on Sunday that “we are close to our targets” and that he expected expect GDP growth to pick up in coming quarters.

However, Steven Englander, global head of G10 FX strategy at Citigroup, warned in a note on Monday that this actually meant that the Fed would “have almost no ability to offset a shock in current circumstances” since the nominal Fed funds rate is currently at 0.5 percent.

Englander suggested that the paper is another argument to continue stimulating the US economy now so it's in a better shape to weather those futures shocks.

However, Allianz SE’s Mohamed El-Erian, who prefers structural reforms to improve the economy, told Bloomberg on Monday that low interest rates contribute to excessive risk taking and creates a “risk of financial instability down the road”.

Monday, 22 August 2016

Thanks in large part to central bank liquidity, stock markets have been rallying. The S&P 500 in particular have been hitting record highs recently.

With the rally, however, US stocks may have become overvalued.

Paul Lim at Time.com pointed out that the Shiller P/E climbed to 27.3 this month. The last time the Shiller P/E was above 27 was in October 2007, at the start of the last bear market

While overvalued markets do not necessarily presage a market downturn, Citigroup’s head of global credit strategy Matt King wrote in a note over the weekend that there are “some cracks appearing” in the market.

“Central bank liquidity no longer refreshes all the parts it used to,” he wrote. He foresees “ever tighter spreads; ever more hand-wringing over a stagnating global economy; ever greater dysfunction in markets”.

Allianz Chief Economic Adviser Mohamed El-Erian also thinks that monetary policy may be reaching its limits. He told CNBC last week: "We have relied excessively on central banks."

He said that the US government needs to craft structural reforms instead, otherwise there is a risk “we're going to take a turn where slow growth turns into recession”.

However, this means that a Federal Reserve rate hike could be problematic.

The Bank for International Settlements warned in a report on Thursday that “the high indebtedness of EMEs’ corporate sector rings alarm bells”. It noted that the “high level of corporate debt has contributed to overheating in some of these economies”.

It added that scheduled repayments are expected to rise sharply from 2016. This means that the refinancing capacity of highly leveraged companies is “likely to be tested soon, especially if the rise of the US dollar continues”.

While US stocks rose on Thursday, a CNBC report suggests that the rally in stocks may have peaked.

It said that the advance-decline line of stocks on the New York Stock Exchange, which had risen to its highest in more than 12 months recently, has turned a touch lower, indicating a loss of momentum.

Breadth has also declined, with 76 percent of the sub-industries in the S&P Composite 1500 trading above their 50-day moving averages on Tuesday, down from 95 percent on 15 July.

All this is occurring as investors have become more optimistic. The AAII Investor Sentiment Survey and US Investors Intelligence survey showed bullishness among investors rose in the last week to 35.6 percent and 56.2 percent respectively.

The Investors Intelligence newsletter's co-editor John Gray said the above-55 percent level of bullishness "is considered the danger level" for the stock market.

Thursday, 18 August 2016

In the US, the S&P 500 rose 0.2 percent and the 10-year Treasury yield fell three basis points after minutes of the Federal Reserve’s last meeting showed that officials saw little risk of a sharp rise in inflation.

In Asia, the Shanghai Composite was flat but the Nikkei 225 rose 0.9 percent as the yen halted its rally.

While investors on Wednesday welcomed the dovish turn in prospects for US monetary policy, there appears less scope for a more dovish Japanese monetary policy. According to a Bloomberg report, Japan’s biggest banks are running out of room to sell their government bond holdings.

“Banks are the first port of call” as the BOJ seeks to boost its JGB holdings by 80 trillion yen annually, said Shuichi Ohsaki, the chief rates strategist at Bank of America Merrill Lynch in Tokyo. “But they’re losing capacity to cut beyond those that are reaching maturity.”

US Treasuries also fell, with the yield on the 10-year note rising two basis points to 1.57 percent.

US stocks remain near record highs though even as regulatory filings showed that big-name hedge fund investors like George Soros, Jeffrey Gundlach, Carl Icahn and David Tepper slashed their long equity positions in the second quarter.

However, investors have become more bullish recently. According to a Bank of America Merrill Lynch Fund Manager Survey released on Tuesday, cash positions for August fell to 5.4 percent of portfolios, down 0.4 percentage point from July, as fund managers adjusted to an overweight position on US stocks.

"There is some risk that we're approaching stall speed here," Art Cashin, director of UBS floor operations at the New York Stock Exchange, told CNBC on Monday.

Allianz Global Investors' Kristina Hooper also told CNBC that there are "certainly a lot of question marks" around the rally but added that "stocks are the most attractive asset class among a sea of relatively unattractive asset classes".

Similarly, Mary Ann Bartels, head of portfolio strategy at Merrill Lynch Wealth Management, said she expects greater "episodic volatility" but thinks that there "is no other alternative" to US stocks.

And yet, Bloomberg points out that there are features in the latest rally that is making the bull market look more sustainable.

From last week’s confluence of record highs to rebounding growth stocks, there’s a lot to like in a market as hated as this one.

No longer are low-volatility stocks the leaders. Nor are utilities, or companies that sell toothpaste and handsoap. Nary a defensive share is rallying as leadership in the S&P 500 Index switches from the dividend-paying bond surrogates that ruled 2015 to technology, banks and commodity firms that benefit from an expanding economy.

Monday, 15 August 2016

One problem with prolonged quantitative easing by a central bank is not just that financial markets become distorted but economies also become distorted.

Bloomberg reports that the Bank of Japan is set to become the top shareholder in Japanese companies.

Already a top-five owner of 81 companies in Japan’s Nikkei 225 Stock Average, the BOJ is on course to become the No. 1 shareholder in 55 of those firms by the end of next year, according to estimates compiled by Bloomberg from the central bank’s exchange-traded fund holdings. BOJ Governor Haruhiko Kuroda almost doubled his annual ETF buying target last month, adding to an unprecedented campaign to revitalize Japan’s stagnant economy.

This poses risks for the economy.

“The BOJ being a stable shareholder of such a large ratio of stocks is going to make investors question if governance is being held to account, and the debate around this is going to get more aggressive as they increase holdings,” Sumitomo Mitsui’s Ichikawa said. “People are going to question how long the BOJ should keep this policy going.”

US and European stocks fell despite a 2.3 percent rise in US crude oil.

US economic data released on Friday were disappointing. Retail sales were little-changed in July while wholesale prices fell 0.4 percent.

“Based on the PPI and retail-sales figures, all indications now look like a [Federal Reserve] rate increase in 2016 is clearly off the table,” said Tom di Galoma, managing director at Seaport Global Holdings.

The good news is that the capital raises have begun. The bad news is that they need to continue.

An analysis of 765 banks in China by UBS Group AG shows that efforts to clean up the country's debt-ridden financial system are well underway, with as much as 1.8 trillion yuan ($271 billion) of impaired loans shed between 2013 and 2015, and 620 billion yuan of capital raised in the same period. But the work is far from over, as to reach a more sustainable debt ratio the Chinese banking sector will still require up to 2 trillion yuan of additional capital as well as the disposal of 4.5 trillion yuan worth of bad loans, according to the Swiss bank's estimates.

And bad loans could continue to pile up from continuing malinvestments. According to Bloomberg, Morgan Stanley has noted that fixed-asset investment growth among China's state-owned enterprises has accelerated across the board in 2016, with the exception of mining.

George Magnus, senior economic adviser at UBS, wrote: "Capital accumulation isn't all or always wrong but if it's largely debt financed and SOE provided, I'd say that malinvestment is still hard at work."

Stocks have been drifting lower amid low trading volumes. “Volumes have been very low as investors seem to be waiting for major market catalysts,” said Angus Nicholson, a market analyst for IG, in a note on Wednesday.

The closely-watched VIX volatility index recently slipped below 11.4, touching its lowest level in more than two years. By comparison, the measure of market turbulence was sitting at nearly 31 last September and it's almost never been in single digits.

Some see this, along with a string of record highs for the American stock market, as a sign that investors have become so comfortable with the state of things that they don't see the dangers that lurk around them. They argue this is the calm before the storm, especially given nervousness about the global economy, the upcoming U.S. elections and Corporate America's yearlong profit recession.

On the other hand, Mark Hulbert thinks that the concerns over the low VIX reading is unwarranted.

According to data from the CBOE, Hulbert said that the stock market’s return whenever the VIX falls below 12 is virtually the same as it is whenever the VIX is above its historical median of 18.6.

Wednesday, 10 August 2016

In the US, the S&P 500 was flat but the Nasdaq Composite rose 0.2 percent to hit a record high.

In Europe, the STOXX Europe 600 rose 0.9 percent as the DAX jumped 2.5 percent to put it in a bull market.

In Asia, the Nikkei 225 and Shanghai Composite Index both rose 0.7 percent.

Stocks rose despite US crude oil falling 0.6 percent.

The yield on the US 10-year Treasury note declined to 1.545 percent from 1.587 percent on Monday.

Low bond yields could keep the stock bull market alive by encouraging companies to use debt markets to finance stock buy-backs. From Bloomberg:

Led by Apple Inc. and CBS Corp., S&P 500 constituents have rushed to sell bonds to finance the repurchases of their own stock. The proportion of buybacks funded by debt rose above 30 percent in June for the first time since 2001, data compiled by JPMorgan Chase & Co. and Bloomberg show.

Monday, 8 August 2016

China's public finances are in worse shape than is commonly understood. And as debt levels rise and the economy remains sluggish, the government's ability to boost growth looks increasingly precarious. Without reform, that will have some grim consequences.

Problems could show up in its currency. Indeed, Bloomberg reported that Mark Hart of Corriente Advisors has been betting against China’s currency for seven years.

Hart’s case, in a nutshell, is this: China’s currency is wildly overvalued. By some accounts, the yuan’s real effective exchange rate vs. the dollar is twice as high as it was two decades ago and almost 40 percent higher than it was in 2008. Hart foresees a one-off devaluation of at least 30 percent, maybe more, with consequences worse than those of the global financial crisis. Otherwise, he says, Beijing will just burn through foreign exchange reserves trying to fight a losing battle.

Friday, 5 August 2016

The BoE lowered interest rates by 25 basis points to a record-low 0.25 percent. It also announced plans to buy 60 billion pounds of government bonds with newly-created money over the next six months as well as 10 billion pounds of high-grade corporate debt.

"Today's decision will test the limits of monetary policy which many would argue ran out of runway some time ago," said Bill Michael, global head of financial services at KPMG.

At least investors seem impressed by the BoE's move. The FTSE 100 jumped 1.6 percent on Thursday while the pound fell against both the dollar and the euro.

Bloomberg reported that investors this week paid the smallest premium in almost two months to protect against a drop in prices through the end of the year.

Andy Hall told investors in his hedge fund, Astenbeck Capital Management, that “extreme positioning coupled with improving fundamentals should ultimately – and at potentially any time – result in a strong reversal”.

Tuesday, 2 August 2016

In the US, stocks were dragged down by a fall in oil prices. West Texas Intermediate crude fell 3.7 percent, leaving it down 21.8 percent from a 52-week high hit in early June and putting it in a bear market.

In a note on Monday, analysts at Tradition Energy wrote that traders are focusing on “near glut levels of supply”. Reuters reported on Friday that OPEC's oil output in July likely reached its highest in recent history.

“Bonds have risen sharply in value, and their yields, which move in the opposite direction, have plummeted,” he wrote. “That has made stock prices look cheap and dividends generous.”

In addition, the strong dollar has made stock sectors that are fairly impervious to exchange-rate shifts especially attractive, he said.

However, Sommer quoted Craig Moffett, a senior analyst at MoffettNathanson, as saying: “Many of the valuations in the market don’t make sense right now in isolation. The risk for investors is that if interest rates start to rise, stock prices could start to shift almost overnight.”

Indeed, Jeffrey Gundlach, the chief executive of DoubleLine Capital, said on Friday that stock investors have entered a “world of uber complacency”.

In an interview with Reuters, he said that the risk-reward ratio for Treasuries is “horrific” and there is “no upside” in Treasury prices.